The Regulation And Operations Of Financial Institutions in Nevada

The Nevada Department of Business and Industry (the “Department”) oversees the organization, licensing, operation, and dissolution of financial institutions. The Nevada Division of Financial Institutions (the “NFID”) within the Department has supervisory control of most financial services businesses operating in Nevada, such as state-chartered banks, thrifts, savings and loan firms and credit unions, as well as trusts, installment loans, high-interest loans, and collection agencies. Since 1999, mortgage brokers and mortgage bankers have been subject to the jurisdiction of the Nevada Mortgage Lending Division (the “NMLD”).

Regulation of the Business of Banking

State-chartered banks

A bank organized under Nevada law may provide the typical range of financial services performed by state-chartered banks, such as receiving deposits, discounting and negotiating promissory notes, drafts, bills of exchange and other evidence of indebtedness, buying and selling exchange, coin and bullion, and making secured or unsecured loans.[1] State-chartered banks also may issue and confirm letters of credit.[2] In addition, a state-chartered bank may, with the written consent of the Commissioner of Financial Institutions, exercise any authority or perform any act that a national bank may exercise or perform, including engaging in derivative transactions.[3] While state-chartered banks must maintain their principal office in Nevada, a Nevada-chartered bank can operate branch offices and services centers both within the state and in other states.[4]

The NFID both supervises the organization of, and charters, state banks.[5] Before receiving a charter, applicants must satisfy the Commissioner of Financial Institutions of the fitness of the stockholders, officers, and managers of the proposed bank and that, if chartered, the bank will be lawfully entitled to commence the business of banking. This evaluation includes an assessment as to public confidence in the designated bankers and that the proposed institution will meet the needs and promote the convenience of the community to be served.[6] In addition, the bank must secure membership in the Federal Deposit Insurance Corporation and meet the capitalization, working capital, and financial stability requirements for state-chartered banks.[7]

Out-of-state and foreign banks

Similar to requirements for a state-chartered bank, an out-of-state or foreign bank desiring to establish a branch in the State of Nevada must be licensed and chartered by the NFID.[8] In addition to other requirements and regulations, in order for a foreign bank to obtain a charter in Nevada, the foreign bank must establish that the foreign bank is of good character and sound financial standing, is adequately managed, and will satisfy the convenience and needs of persons to be served.[9]

Interstate banking

Nevada law also regulates certain aspects of interstate banking that affect a depository institution or bank holding company whose home state is Nevada or instances where interstate bank branching may impact the state. For example, any direct or indirect acquisition[10] of a depository institution or holding company whose home state is Nevada requires the NFID’s prior approval.[11] Interstate banking organizations in Nevada are subject to regulation in the same manner as banks organized and chartered in Nevada.[12]

Nevada law also authorizes a depository institution to act as an agent for affiliated depository institutions.[13] Specifically, a depository institution may, at its main office or at any branch, act as an agent of any other depository institution that is a subsidiary of the same holding company.[14] Subject to statutory limitations, a depository institution acting as such an agent may receive deposits, renew time deposits, close loans, service loans, and receive payments on loans and other obligations.[15]

Other Types of Financial Institutions

Trust Companies

Nevada recognizes two types of trust companies, “retail trust companies” and “family trust companies.”[16] A retail trust company is an organization that is engaged as a trustee, fiduciary, or agent for individuals or businesses in the administration of trust funds, estates, custodial arrangements, stock transfer and registration and other related services.[17] As a fiduciary, a retail trust company may engage in fiduciary investment management functions and estate planning.[18] Retail trust companies must be licensed and are regulated by the NFID.[19]

In Nevada, an applicant for a license to conduct the business of a retail trust company must be organized as a corporation or limited liability company under the laws of Nevada or authorized to do business in Nevada as a foreign corporation or foreign limited liability company.[20] A retail trust company licensed in Nevada is required to maintain its principal office within the state and is prohibited from conducting trust company business at any office located outside of Nevada without prior approval from the Commissioner of Financial Institutions.[21] Directors and managers of domestic retail trust companies must meet various character and board composition requirements.[22] Retail trust companies must also satisfy statutory stockholders’ equity requirements, which amounts may be increased as required by the Commissioner of Financial Institutions.[23]

License fees for retail trust companies are assessed pursuant to regulations adopted by the Commissioner of Financial Institutions.[24] Nevada statutory law enumerates the powers of licensed retail trust companies and specifically prohibits a retail trust company from engaging in any banking business by acting as a depository institution or making loans.[25] Statutes impose certain bond and insurance requirements on all active officers, managers, and employees of the retail trust company.[26]

A family trust company is an organization that acts as trustee, fiduciary, or agent only for family members and does not conduct business with the public.[27] Family trust companies are not required to be licensed, but may apply for a retail trust company license or a family trust company license.[28] A family trust company must pay a licensing fee and comply with various organizational and stockholders’ equity requirements.[29]

Thrift Companies

Thrift companies are licensed by NFID and, like a bank, may accept all forms of depository accounts. A thrift company may lend money on various types of security, and may purchase, sell or discount specific financial instruments and contracts.[30] A thrift company license will not be issued unless the Commissioner of Financial Institutions is satisfied that the public convenience and advantage will be promoted in the geographical area proposed for the operation, that there is an adequate capital structure supporting the applicant, and that the proposed officers, directors, stockholders, and other investors are trustworthy, responsible, and of good character.[31] Nevada law imposes minimum stockholders’ equity and reserve requirements on the licensee and each branch office.[32]

The Nevada Thrift Companies Act provides that a thrift company must have its deposits insured pursuant to the provisions of either the Federal Deposit Insurance Act or the National Housing Act. In limited circumstances applicable only to “grandfathered” licensees certificated prior to October 1, 1997, a private insurer approved by the NFID may insure a thrift company’s deposits.[33] Once licensed as a Nevada thrift company, the state banking code provides a procedure under which the thrift company can be statutorily converted to a state-chartered bank.[34]

Nevada law does not specifically provide for the formation and licensing of industrial loan banks (“ILB”). An ILB is typically a financial services affiliate of a manufacturing business that functions primarily to provide credit to consumers purchasing the products and related services of the manufacturing business. The Commissioner of Financial Institutions interprets and applies the Nevada Thrift Companies Act to facilitate the formation and operation of ILBs in Nevada.

Credit Unions

The NFID also licenses and regulates credit unions.[35] Before the Nevada Secretary of State will issue a certificate of incorporation to a credit union, the Commissioner of Financial Institutions must approve the articles of incorporation.[36] As with a state-chartered bank or thrift company, the Commissioner of Financial Institutions will grant permission to organize as a credit union only after determining the good character and financial responsibility of the applicants and the community need for and competitive impact from the proposed operation.[37] Credit unions organized under the laws of another state may conduct business in Nevada by obtaining a certificate of authority from the Commissioner of Financial Institutions.[38] A foreign credit union must file with the NFID a copy of its annual report at the time it files a similar report with the officer of the state in which it was organized.[39]

Like other financial institutions, a credit union must comply with various capitalization, reserve, and surety requirements.[40] Nevada law also restricts membership in a credit union to people who share a “common bond,” such as the same employer or occupation, or residence within an identifiable neighborhood or community.[41]

Savings and Loan Associations

Nevada law provides that firms whose principal and primary business is to borrow, loan, and invest money that are not otherwise organized and licensed as a bank, thrift, credit union, trust company, or other specific type of financial institution, will be regulated as a savings and loan.[42] As with a state-chartered bank or thrift company, a license for a savings and loan association is granted by the Commissioner of Financial Institutions only after determining the good character and financial responsibility of the applicants, the community need for and competitive impact from the proposed operation, and the probability of the association’s success and stability.[43] Like other financial institutions, a savings and loan association must comply with various capitalization, reserve, and surety requirements.[44] Unless grandfathered, a foreign savings and loan association — one not formed under Nevada law — may not be a depository institution except as permitted by Nevada’s foreign and interstate banking laws.[45] A Nevada association can convert into a federal savings and loan upon complying with specific statutory requirements and federal associations are statutorily granted the same powers and protections of a state licensee.[46] Similarly Nevada statutes provide a method by which a federal association can convert to a state licensed savings and loan association.[47]

Unlike a licensed thrift company, a savings and loan association licensed in Nevada may only accept savings deposits and issue investment certificates.[48] Although a savings and loan is organized principally to accept savings deposits and make real estate loans using those deposits,[49] Nevada law does not place such limits upon either the type of loans or forms of investments made by a licensee.[50]

Mortgage Bankers and Mortgage Brokers

A mortgage broker acts as the paid agent of either a borrower or lender by arranging the making of a loan secured by real property, or by arranging a loan’s resale. A mortgage broker does not lend its own money. Unless exempt, anyone acting as a mortgage broker must be licensed and deposit a corporate surety bond with the Commissioner of Mortgage Lending.[51] Under Nevada law, mortgage brokers owe a fiduciary duty to their clients, meaning that they must, among other things, act in the client’s best interest and disclose any financial, business, professional, or personal interest they have in conducting a mortgage transaction for the client.[52]

All licensed mortgage brokers must have a qualified employee to oversee the day-to-day operations of the company.[53] Any employee of a mortgage broker who performs activities which would require the employee to be licensed as a mortgage broker if the person were not the employee of a mortgage broker must be licensed as a mortgage agent.[54] Additionally, mortgage brokers and their employees who, for compensation, conduct the origination activities of taking applications for, or of offering and/or negotiating loan terms of, residential loans, must be licensed as mortgage agents.[55] A Nevada licensed mortgage broker may apply for a license for an out-of-state office from which Nevada business may be conducted, provided that the applicant has a license for an office located within the State.[56]

A mortgage banker is a person in the business of (i) buying or selling notes secured by liens on real property, (ii) making loans secured by real property using the mortgage banker’s “own money,” or (iii) negotiating, originating, or brokering a commercial mortgage loan on behalf of an institutional investor.[57] The primary distinction between a mortgage broker and a mortgage banker is that a mortgage broker uses other people’s money while a mortgage banker uses its own money.[58]

As with a mortgage broker, a mortgage banker must have a qualified employee to oversee the day to day operations of the company. Also similar to the case of mortgage brokers, certain employees of mortgage bankers, as well as mortgage bankers and certain related parties conducting loan origination activities, must be licensed as mortgage agents.[59] Subject to other licensing requirements, a mortgage banker (or a subsidiary or affiliate thereof) that holds a license for an office in Nevada also may be licensed to conduct Nevada business at branch offices both in Nevada and from an office outside of Nevada.[60]

Failing to obtain a required mortgage broker, mortgage banker, or mortgage agent license may result in a civil action by a client for actual, consequential, and punitive damages.[61] Additionally, any mortgage transaction contracts entered into by a person who fails to first obtain a required mortgage broker, mortgage banker, or mortgage agent license are voidable by the other party to the contract.[62]

The NMLD has the authority to grant exemptions for specific loans; residential mortgage loans, however, do not qualify for an exemption.[63] Additionally, certain lenders are exempt from the requirements under NRS Chapters 645B and 645E.[64] Finally, a foreign person or entity that is not considered to be doing business in the State of Nevada does not need to obtain a certificate of exemption under NRS Chapter 645B unless that person (i) maintains an office in Nevada to transact business, (ii) solicits or accepts deposits in the State, subject to certain exceptions, (iii) solicits business in Nevada for the activities of a mortgage broker or mortgage banker, or (iv) arranges a mortgage loan secured by residential real property.[65]

Nevada has established licensing requirements for individuals and companies conducting (i) loan modification consulting, (ii) foreclosure consulting, and (iii) covered service activities (collectively hereinafter “Service Consultants”).[67] The process for obtaining these licenses is established in regulations issued by the Commissioner of Mortgage Lending.[68]

A loan modification license only allows the holder to assist a homeowner in adjusting the terms of a mortgage loan.[69] A foreclosure consultant license authorizes the holder to assist a homeowner in a variety of ways including preventing or postponing a foreclosure sale, avoiding damage to the homeowner’s credit score, and exercising any right of reinstatement.[70] A covered service provider license permits the holder to provide homeowners loan modification or foreclosure consulting services, as well as other services including financial counseling and assisting with the preparation of documents for filing with a bankruptcy court.[71]

Covered services consultants may not give advice related to the avoidance or postponement of a foreclosure sale, provide any financial counseling or advice, even as it relates to foreclosures, discuss options related to obtaining a new loan or filing of a bankruptcy, assist a homeowner to exercise the right of reinstatement, obtain any waiver of an acceleration clause contained in a note, or assist a homeowner in obtaining a foreclosure reconveyance.[72]

Service Consultants are prohibited from requesting or receiving payment from a homeowner unless and until the homeowner actually executes a written agreement with the lender, and then only if that written agreement incorporates the offer of mortgage assistance obtained from the lender by the Service Consultant.[73] Service Consultants must comply with various recordkeeping requirements, consumer notices and disclosures, and rules of conduct specified by statute.[74]

Installment Loan Companies

Unless a firm is regulated as another form of financial institution or is exempt, the company must hold an installment loan license to make or arrange loans not secured by real estate.[75] The company must be financially solvent, have at least $50,000 in liquid assets for use in the operation of the business, and the principals must demonstrate ability to conduct installment loan lending activities.[76]

A licensee may not maintain more than “one place of business under the same license.”[77] NFID, however, may issue branch office licenses.[78] Nevada Revised Statutes Chapter 675 also establishes requirements relating to record keeping by licensees,[79] conducting installment loan activities on a premises shared with another business,[80] and lending practices of licensees.[81]

Deferred Deposit and Title Loan Companies

The NFID also licenses and regulates companies offering deferred-deposit loans, title loans, and other high-interest loans (collectively hereinafter “short-term loans”).[82] Companies offering these loans must have a license from the Commissioner of Financial Institutions regardless of the location or method the company uses to operate the short-term loan service (e.g., a kiosk, retail location, or the Internet).[83] However, companies may not offer deferred deposit loan service or high-interest loan service through any sort of automated machine that allows the customer to receive a loan without any additional assistance from another person.[84] Nevada law also requires that certain notices and disclosures be posted at every physical location offering these loan services and on the licensee’s website for Internet operations.[85]

In Nevada, the amount of a deferred deposit loan or high-interest loan cannot exceed 25 percent of the borrower’s expected gross monthly income, and, with some exceptions, licensees cannot give the borrower more than one loan at a time.[86] Depending on the type of short-term loan, Nevada law may also limit the length of the loan term.[87] Licensees providing short-term loans must also comply with a number of other requirements and restrictions including limitations on the collateral a licensee can accept,[88] requirements for offering a repayment plan to defaulting borrowers,[89] and limitations on the amount a licensee can collect from a borrower in default.[90]

Nontraditional Lending Practices

The Commissioner of Financial Institutions and Commissioner of Mortgage Lending have been charged with the task of adopting regulations concerning certain persons and institutions who offer “nontraditional” mortgage loan products, including interest-only loans and certain adjustable rate mortgage loans.[91] Such persons and institutions must disclose to the borrower information concerning the actual costs and risks of the nontraditional mortgage loan product offered.[92] Additionally, a lender who knowingly issues a loan, other than a reverse mortgage, without considering the borrower’s ability to repay the loan has committed an “unfair lending practice.”[93]

[7]. See NRS 659.045 and 659.085(2). Generally, a state chartered bank commencing business in Nevada must have an initial capitalization of at least $2,000,000 to meet the FDIC’s minimum capitalization requirements. This amount is substantially larger than Nevada’s capitalization requirements.

[8]. This requirement does not apply to a foreign bank transacting business authorized under federal law or to a foreign bank with no in-state branch making loans secured by real property. Additionally, a foreign bank organized under the law of a United States territory may operate an interstate branch in Nevada. See NRS 666A.080.

[59] . NRS 645B.400, 645B 0125, and 645E.290. Unlike the law governing mortgage brokers, the law governing mortgage bankers requires licensing in the case of all, not just residential, loan origination. In addition, it covers not only mortgage bankers and their employees but also their independent contractors.